The fourth quarter of 2024 presented a mixed economic landscape, with several weaknesses offset by signs of resilience. The stock market showed volatility, rallying off the election of Donald Trump with returns fading in the days leading up to year end. Equity markets are grappling with concerns over slow economic growth and persistent inflation. However, consumer spending remained strong, and corporate earnings largely exceeded expectations, boosting investor confidence.
In bond markets, concerns over tariff policy and potential deficits led to an increase in interest rates during the quarter. The Federal Reserve cut rates again but signaled that they would slow future rate cuts, going from expecting about 1.00% of cuts in 2025 to now having an expectation of 0.50% in cuts. This is on the back of economic growth being stronger than expected and inflation being stickier at around 3.0%.
Sectors like housing and retail showed signs of strain, but the overall economy demonstrated its adaptability. Job growth, though slower, continued, and the service sector remained robust, suggesting resilience in consumer-driven growth. The Fed’s proactive approach to monetary policy is expected to help foster further recovery in 2025. Looking ahead, the combination of lower rates and strong consumer demand could support economic expansion, despite some underlying weaknesses. HFM remains cautiously optimistic for the year ahead, with expectations of continued growth, albeit at a more tempered pace, as inflationary pressures ease and the economy finds its footing in a lower-rate environment.
Favorability Scale
The sliding scales below are meant to represent HFM’s current assessment of favorability of the market landscape in various investment areas as of the most recent quarter end. Our investment committee is looking to communicate to you a complicated thought process as simply as possible. The favorability scale considers the following factors: Current Yield, Growth, Value, and Market Conditions.
The information contained here should not be construed as a recommendation to purchase or sell any particular security or an assurance that any particular security held in a portfolio will remain in the portfolio or that a previously held security will not be repurchased. Securities discussed may not represent a portfolio’s specific or entire holdings. It should not be assumed that any security transactions or holdings discussed have been or will prove to be profitable or that future investment decisions will be profitable or will equal or exceed the investment performance of the securities or portfolios discussed.
Equity Favorability
HFM Strategic Equity Positioning (Long Term)
HFM team: US equity markets are anticipating significant policy shifts following the election in Washington DC. Investors expect reduced regulatory oversight, lower corporate tax rates, and a more favorable environment for mergers and acquisitions. International markets face greater economic uncertainty. We remain MORE favorable on Equities.
HFM Tactical Equity Positioning (Short Term)
Large Cap
E. Anderson: Markets rallied in Q4 2023, buoyed by election results and economic expansion. Having continued 20% annual returns in the S&P 500 would be unprecedented given the run up over the last two years. The S&P 500’s concentration has intensified, with its top 10 holdings now comprising 40% of the index’s value. We recommend broader diversification beyond these dominant positions to manage risk. We remain MORE favorable on large cap stocks.
Small Cap
HFM Team: Our outlook on small-cap stocks remains mixed. While valuations appear attractive relative to large-caps, their performance hinges on lower interest rates. Recent Federal Reserve guidance suggests rate cuts may come more gradually than markets anticipated. We remain NEUTRAL on small caps.
Cutting Edge
J. Reynolds: We maintain our underweight position in growth stocks given their elevated valuations. While these innovative companies have dominated returns in recent years, their current prices demand exceptionally high growth rates to justify investment. We remain LESS favorable considering very high valuations.
International
HFM Team: International markets face significant headwinds. China’s increased stimulus measures to boost its economy and Germany’s unprecedented post-WWII auto plant closures highlight these challenges. While international stocks trade at a discount to US equities, we maintain a cautious stance given these economic uncertainties. We continue our stance of LESS favorable for international stocks.
Hedged Equity
HFM Team: Given elevated equity valuations and heightened geopolitical risks, we favor hedged equity strategies to help manage portfolio volatility while maintaining market exposure. We remain MORE favorable given stock valuations.
Fixed Income/Bonds Favorability
HFM Strategic Fixed Income Positioning (Long Term)
HFM Team: Our view on fixed income is mixed. While higher yields make bonds more appealing overall, you are getting less income for taking credit risk than historical norms. We remain MORE favorable on fixed income.
HFM Tactical Fixed Income Positioning (Short Term)Favorability
Investment Grade Bonds
C. Pierce: Investment-grade bonds offer historically attractive yield levels, though tight spreads indicate minimal compensation for credit risks. We maintain a positive outlook on the sector, particularly for strategic allocations, given strong corporate credit fundamentals and portfolio stabilization benefits during economic stress. We are now NEUTRAL on investment grade bonds.
High Yield
HFM Team: While high-yield bonds offer enhanced income potential, their current pricing suggests minimal margin for error. We’ve shifted this allocation to CLOs which provide comparable expected returns with lower risk. We are now LESS favorable on high yield given the recent tactical change to CLO’s.
Alternatives Favorability
HFM Strategic Alternatives Positioning (Long Term)
J. Reynolds: Given global trade uncertainties and potential tariff impacts, we favor alternative investments positioned to capitalize on market dislocations. We are now MORE favorable on alternatives.
